Understanding Business Credit: 25 Key Terms
Business credit is a vital aspect of any company, big or small. It is crucial for businesses to establish and maintain good business credit in order to secure loans, lower interest rates, and build trust with potential partners and suppliers.
Cdit Score:Also known as a business credit score, it is a number assigned to a company that represents the level of risk associated with extending credit to them. A higher credit score indicates a lower risk and vice versa.
Biness Credit Report:An overview of a company’s financial history, including its payment habits, outstanding debts, legal filings, and credit score. Lenders and suppliers use this report to make decisions on extending credit.
Dun & Bradstreet: A leading business credit bureau that provides credit reports, scores, and other financial information about companies.
Trade Credit: A type of credit where a supplier allows a company to purchase goods or services on account with the promise to pay at a later date.
Net Terms: The agreed-upon time period for paying back a trade credit, typically 30, 60, or 90 days.
***D****ay Sales Outstanding (DSO)*: A key metric used to measure how long it takes for a company to collect payment from its customers. A lower DSO indicates a more efficient collections process.
Accounts Receivable: The amount of money owed to a company by its customers for goods or services provided on credit.
Credit Limit: The maximum amount of credit that a lender is willing to extend to a business.
Collateral: An asset pledged by a borrower to secure a loan, which the lender can seize if the borrower defaults on their payments.
Collateralized Loan: A loan that is backed by collateral, reducing the lender’s risk in case of default.
Line of Credit: A flexible type of credit where a lender agrees to lend up to a certain amount for a specified period, and the borrower can draw on these funds as needed.
Loan Term: The length of time given to repay a loan.
Amortization: The process of paying off debt in regular installments over a set period.
Capital Expenditure: Money spent by a business on acquiring or upgrading long-term assets, such as equipment or property.
Balance Sheet: A financial statement that provides an overview of a company’s assets, liabilities, and equity at a specific point in time.
Income Statement: A financial statement that shows a company’s revenues, expenses, and profits over a specified period.
Cash Flow Statement: A financial statement that tracks the inflow and outflow of cash in a business.
Profit and Loss (P&L) Statement: Another term for an income statement.
Interest Rate: The percentage charged by a lender on a loan or credit line.
Annual Percentage Rate (APR): The annual interest rate charged on a loan or credit line, including any additional fees or charges.
Commercial Loan: A type of loan specifically designed for businesses to finance their operations or expansion.
Secured Loan: A loan backed by collateral, reducing the lender’s risk.
Unsecured Loan: A loan that is not backed by collateral, making it riskier for the lender.
Personal Guarantee: An individual’s personal pledge to repay a business loan in case the borrower defaults on their payments.
Factoring: The process of selling accounts receivable to a third party, known as a factor, at a discount in exchange for immediate cash. This helps businesses improve their cash flow and reduces the risk of non-payment by customers.
Congratulations, you have successfully completed the journey of understanding business credit! By now, you should be familiar with 25 key terms that are essential in navigating and building your business credit. But don’t stop here – continue to do further research and stay up-to-date with the latest developments in the world of business credit.